(Bloomberg) — It’s official: Tenants in New York City who file for bankruptcy won’t lose their below-market-rate apartments, thanks to a pair of opinions from the New York State Court of Appeals and the Manhattan-based U.S. Court of Appeals for the Second Circuit.
Combined, the decisions remove the threat that people who file for bankruptcy in New York will be evicted from valuable apartments even though they’re current on the rent.
A group representing city landlords said the decisions “open the floodgates of imposing unprecedented financial and legal obligations” on “private property owners who provide rent-controlled apartments.”
Some New York housing stock is covered by rent-control and rent-stabilization laws dating from World War II. Regulated rents allow thousands of renters to pay sometimes much less than market rates while enjoying protections from eviction.
A woman in New York who filed for bankruptcy was told by a federal district judge in September 2012 that the value of her lease was property of the bankruptcy estate that the landlord could buy from the trustee.
The tenant took her case to the federal appeals court in Manhattan. That court asked the state’s highest court, the New York Court of Appeals, to rule on whether the right to live in a rent-stabilized apartment is “property” that can be sold.
In November, the state court ruled 5-2 that rent-stabilization rights are an exempt asset as a form of public assistance, which a bankruptcy trustee can’t sell. New York Attorney General Eric T. Schneiderman and Zachary W. Carter, New York City’s corporation counsel and chief lawyer, have both sided with tenants on the question.
In light of the state-court decision, the Second Circuit ruled Monday that a below-market lease is exempt from creditor claims as a public benefit.
The Rent Stabilization Association of New York City Inc. had urged the federal court not to follow the state court’s decision. The landlord group called the decision a “radical interpretation” that makes the rent-stabilization system “a partial government taking without just compensation.”
The landlords argued that turning a lease into a public benefit might “create unforeseen tax consequences for rent-stabilized tenants, in the form of imputed income.”
The case involved a $700-a-month apartment on Manhattan’s East Seventh Street. The landlord offered to buy the lease from the bankruptcy trustee and pay the tenant’s creditors in full. In addition, the landlord offered the tenant $100,000 to move out.
Alternately, the landlord would have let the tenant stay for the rest of her life, but she wouldn’t have been allowed to sublet or allow heirs to take over the apartment at her death.
The case in the federal court is Santiago-Monteverde v. Pereira (In re Santiago-Monteverde), 12-4131, U.S. Court of Appeals for the Second Circuit (Manhattan)